Costco's Troubles

Costco Wholesale Corp. (NASDAQ: COST) is often cited as the best-run large retailer in the United States. The opinion shows in the company’s share price. It is up 13% this year, while the market has risen 9% and larger rival Walmart’s stock is up less than 3%. However, Costco’s sales hit a wall in May, which should cause worry about the American consumer economy. (These companies have the best reputations.)

Costco is the only large consumer retailer that charges money for people to shop in its stores. (Walmart’s Sam’s Club also charges, but it is a store aimed at businesses, not consumers.) A basic annual subscription is $60. Costco offers enough steep discounts that its members often think this is an extraordinary deal.

In May, comparable store sales in the United States dropped 1.5% from the same period of last year. Revenue rose only 1.2% to $18.23 billion. Both were below the pace for the past 39 weeks. Costco has 587 stores in America, out of a worldwide total of 853.

Costco is a bellwether for the middle-class shopper. Based on its prices and the annual subscription, it is a step up demographically from Walmart and Target. If middle-class shoppers are worried about the economy, it shows up in Costco’s results.

The middle-class consumer is at the heart of the part of the American population that drives gross domestic product. People who make less money do not have enough discretionary income to make a large difference. They spend most of their money on basics, and Walmart targets this group. Rich Americans are not enough of the population to show up much in very broad measures of consumer behavior.

Consumer sentiment has been weak recently. Inflation is blamed for most of this. Worrying about an upcoming recession makes up most of the rest.

Costco’s June sales will be telling. Was May an aberration or the start of a pattern?

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